The Battle for DuPont

Though the DuPont Company has been trying to persuade me otherwise, I feel safe in saying that Trian Fund Management is one of the better shareholder activists around. Led by Nelson Peltz, 72, it takes stakes in good companies that, in its view, are struggling operationally. It then seeks board representation, from which vantage point it examines the company from top to bottom and presses the rest of the board to make changes that will raise the stock price.

Trian tends to stick with companies for years, rather than cutting and running. Its track record for creating “shareholder value” is impressive. Even Martin Lipton, the corporate lawyer who made a career out of denouncing shareholder activists, has described Trian and Peltz as having “established credibility.”

Edward Garden, who is Trian’s chief investment officer, says, “We work constructively with companies to get their businesses back on track.”

And although Trian has been trying to persuade me otherwise, I feel equally safe in saying that DuPont is a pretty well-run company. Under the leadership of Ellen Kullman, a company veteran who became its chief executive in 2009, this once unwieldy conglomerate has undergone a great deal of change, with more still to come. It has cut some $2 billion in costs, eliminating a third of its management; announced the spinoff of its performance chemicals business; and “refreshed” its board with such corporate stalwarts as Edward Breen, who is best known for turning around Tyco International in the early 2000s. Since Kullman took over, the company has delivered 266 percent in total shareholder returns, easily outpacing the Standard & Poor’s 500-stock index. It is in the middle of a major restructuring designed to boost earnings growth.

“I am passionate about building a company that will be relevant and will deliver great value in the decades to come,” says Kullman.

Yet, since January, this activist hedge fund and this centuries-old company have been engaged in a bruising proxy fight, which culminates on Wednesday at DuPont’s annual meeting. Trian, which owns a $1.8 billion stake in DuPont, has been pushing the company to add Peltz and others to its board for the last year and a half. It’s come up with a series of white papers outlining what it views as serious deficiencies in DuPont’s operational track record, and it has suggested cutting out even more costs and perhaps breaking the company into two. DuPont’s board, meanwhile, has spent a good deal of money and time analyzing Trian’s ideas. But when it concluded they weren’t an improvement over Kullman’s own plan, Trian refused to go away. Hence the proxy fight.

There is a decent chance that Trian will win. The two biggest proxy advisory firms are backing Trian to one degree or another. Given Trian’s track record, the theory goes, what would be the harm of adding Peltz to DuPont’s board? “When there’s doubt, companies rather than activists probably deserve the benefit of it,” wrote Kevin Allison at Reuters Breakingviews. But, he added, Peltz was often a constructive force, and besides, under DuPont’s bylaws, he can be on the board only for a year without a special exemption because of his age. In other words, why not give him a whirl and see how it goes?

For anyone who has followed the rise of shareholder value, this is a striking turn of events. Have we really gotten to the point where the activist now gets the benefit of the doubt, no matter how well run the company? And the corporation is expected to make whatever radical change the activist seeks, all in the name of shareholder value? In the DuPont/Trian fight, the hedge fund is on record as saying that the company is not getting a return on its research-and-development spending. Yet R.& D. — science — is at the very heart of DuPont’s business model and always has been. And it can take years to turn a scientific advance into a successful product. A DuPont stripped of much of its R.& D. doesn’t just hurt the company; it hurts the country.

Which brings me back to Martin Lipton, the corporate lawyer who views shareholder activism with disdain. It was the Trian side that pointed me to a note he had written to his clients — that’s where he had described Peltz as credible. But when I talked to Lipton, he made it clear that he was not offering an endorsement but rather some practical advice: Activist funds are now such a powerful force in the market that many companies — even good ones — have no choice but to offer them board seats.

That doesn’t mean Lipton thinks the trend is a good one. “Activism has caused companies to cut R.& D., capital investment and, most significantly, employment,” he said. “It forces companies to lay off employees to meet quarterly earnings.”